On the eve of the Greek Parliament's critical vote on austerity measures, ECB President Jean-Claude Trichet stressed the need "to develop a renewed vision of the kind of Europe we want and indeed need," Bloomberg reports.
In case it isn't already clear, what's happening in Greece has ramifications for the broader European Union --- and quite possibly the entire global economy. Financial markets rallied Tuesday ahead of the Greek vote but huge questions remain about "where, in a strategic way, the Europeans are going with their project…of European integration," says Zanny Minton Beddoes, economics editor at The Economist.
Amid serious discussion by "serious" people about whether Greece should drop the euro, Minton Beddoes notes it's not so simple as an old-fashioned currency devaluation. Greece dropping the euro — either voluntarily or by force — would represent a "rupturing" of the single currency and spur a "rethink about the safety of debt in Europe," she says. That, in turn, would have "knock-on effects" for Ireland, Portugal and, quite possible, Spain and Italy.
While fear of financial contagion spreading from Greece to Spain is a more acute concern to most observers, including Minton Beddoes, yields on Italy's 10-year debt reached the highest level in nearly three years Tuesday. Meanwhile, shares of Italian banks have remained under pressure since Moody's warning about possible downgrades last week.
The good news is Minton Beddoes does not believe a Lehman-like financial panic is likely to result from the Greek saga, assuming the austerity measures pass; results of the voting are expected Wednesday morning around 7 a.m. EDT. (See: Huge Uncertainty Over Greece: EU "Nuts Not to Have a 'Plan B,'" Minton Beddoes Says )
This relatively optimistic view is based on her belief that the real issues with Lehman — the interconnected nature of its operation and the "huge opacity" over the value of its assets are not present in the Greek situation. With Greece, there is one main assets — sovereign debt — and it's "much clearer who owns it," she says.
Still, "even without that [Lehman-like] cataclysm, you can have this spiraling of panic [which] doesn't have to have a rationale basis," Minton Beddoes warns. (See: Shades of 2008: A Greek Default Won't Be 'Contained', John Mauldin Says)
The risk of "Lehman-like parallels" -- Fitch estimates U.S. money market funds have $800 billion of exposure to European banks as of May 31 -- explains why the former IMF economist is disappointed with European policymakers for talking a big game about trying to hold the EU together "but doing it in tiny, itsy-bitsy steps."
One way or another, Europe is going to take a big step on Wednesday toward some uncertain future, and the whole world will be watching, anxiously. Stay tuned for additional coverage.